Trade and Integration

Question 1

WTO

Answer 1

1. an international body responsible for negotiating trade agreements and ‘policing’ the rules of trade to which its members sign up.
2. Trade disputes between members are settled by the WTO.

Question 2

Absolute advantage

Answer 2

where one country is able to produce more of a good or service with the same amount of resources, such that the unit cost of production is lower.

Question 3

Reciprocal absolute advantage

Answer 3

Where, in a theoretical world of two countries and two products, each country has an absolute advantage in one of the two products.

Question 4

Comparative advantage

Answer 4

Where one country produces a good or service at a lower relative opportunity cost than others.

Question 5

Relative opportunity cost

Answer 5

The cost of production of one good or service, in terms of the sacrificed output of another good or service in one country relative to another.

Question 6

Terms of trade

Answer 6

The price of a country’s exports relative to the price of its imports.

Terms of trade = [Index of average export prices] / [index of average import prices] x 100%

Question 7

Trading possibility curve (TPC)

Answer 7

A representation of all the combinations of two products that a country can consume if it engages in international trade.

The TPC lies outside the production possibility curve (PPC) showing the gains in consumption possible from international trade.

Question 8

Factor endowments

Answer 8

The mix of land, labour and capital that a country posses.
Factor endowments can be determined by, among other things, geography, historical legacy, and economic and social development.

Question 9

Factor intensities

Answer 9

The balance between land, labour and capital required in the production of a good or service.

Question 10

Labour-intensive production

Answer 10

Any production process that involves a large amount of labour relative to other factors of production.

Question 11

Capital-intensive production

Answer 11

Where the production of a good or service requires a large amount of capital relative to other factors of production.

Question 12

Heckscher-Ohlin theory of international trade

Answer 12

A theory that a country will export products produced using factors of production that are abundant, and import products whose production requires the use of scarce factors.

Question 13

Infant industries

Answer 13

Industries in an economy that are relatively new and lack the economies of scale that would allow them to compete in international markets against more established competitors in other countries.

Question 14

Profit margin

Answer 14

the difference between a firm’s revenue and costs, expressed as a percentage of revenue.

Question 15

Dynamic efficiencies

Answer 15

• efficiencies that occur over time.
• International trade can lead to changes in behaviour over a period of time that can increase productive and allocative efficiency.

Question 16

Knowledge and technology transfer

Answer 16

the process by which knowledge and technology developed in one country is transferred to another, often through licensing and franchising.

Question 17

Licensing arrangements

Answer 17

an agreement that ideas and technology ‘owned’ by one company can be used by another, often for a charge.

Question 18

Regional trading bloc

Answer 18

• Countries in a region that have formed an ‘economic club’ based on abolishing tariffs and non-tariff barriers to trade.
  e. g. the EU, NAFTA, ASEAN

Question 19

Primary commodities

Answer 19

goods produced in the primary sector of the economy, such as coffee and tin.

Question 20

Prebisch-Singer hypothesis

Answer 20

• The argument that countries exporting primary commodities will face decreasing terms of trade in the long run,
• leading them to have to export more and more in order to ‘pay for’ the same volume of imports of secondary sector goods / capital goods,
• which traps them in a low level of development.

Question 21

Developed economies

Answer 21

Countries with a
1. High income per capita
2. Diversified industrial and tertiary sectors of the economy.
Examples: USA, UK, Japan and South Korea.

Question 22

Developing economies

Answer 22

Countries with

1. Relatively low income per capita
2. Industrial sector is small / undeveloped
3. Primary sector production is a relatively large part of total GDP.

Question 23

Liberalisation (international trade context)

Answer 23

Reductions in the barriers to international trade, in order to allow foreign firms to gain access to the market for goods and services that are traded internationally.

Question 24

Transition economies

Answer 24

Economies in the process of changing from central planning to the free market.

Question 25

Intra-regional trade

Answer 25

Trade between countries in the same geographical area, for example, trade between UK and Germany, or the US and Canada.

Question 26

Inter-industry trade

Answer 26

Trade involving the exchange of goods and services produced by different industries.

Question 27

Intra-industry trade

Answer 27

Trade involving the exchange of goods and services produced by the same industry.

Question 28

Freely floating exchange rate

Answer 28

a system whereby the price of one currency expressed in terms of another is determined by the forces of demand and supply.

Question 29

Fixed exchange rate

Answer 29

an exchange rate system in which the value of one currency has a fixed value against other countries. This fixed rate is often set by the government.

Question 30

Semi-fixed/semi-floating exchange rate.

Answer 30

an exchange rate system that allows a currency's value to fluctuate within a permitted band of fluctuation.

Question 31

Foreign Exchange (FOREX) Market

Answer 31

a term used to describe the coming together of buyers and sellers of currencies

Question 32

Short term capital flows (§11)

Answer 32

- flows of money in and out of a country in the form of bank deposits. - Short-term capital flows are highly volatile and exist to take advantage of changes in relative interest rates.

Question 33

Long-term capital transactions (§11)

Answer 33

Flows of money related to buying and selling of assets, such as land or property of production facilities (direct investment) or shares in companies (portfolio investment).

Question 34

External economic shocks

Answer 34

Unexpected events coming from outside the economy that cause unpredicted changes in AS or AD. Examples: rapid rises in oil prices, global slowdown.

Question 35

Purchasing power parity (PPP)

Answer 35

1. The exchange rate that equalises the price of a basket of identical traded goods and services in two different countries. 2. PPP is an attempt to measure the true value of a currency in terms of the goods and services it will buy.

Question 36

J-curve effect

Answer 36

- Shows the trend in a country's balance of trade, following a depreciation of the exchange rate. - Fall in ER causes initial worsening of balance of trade, as higher import prices raise value of imports, and lower export reduce the value of export, due to SR price inelasticity of the demand for imports and exports. - Eventually the trade balance improves. - An appreciation of the currency causes an inverted J curve effect.

Question 37

Marshall Lerner Condition

Answer 37

For a depreciation of the currency to improve the balance of trade, the sum of the price elasticities of demand (PEDs) for imports and exports must be greater than 1.

Question 38

Hedging

Answer 38

Business strategy that limits the risk that losses are made from changes in the price of currencies or commodities

Question 39

Futures markets

Answer 39

Markets where people and businesses and buy and sell contracts to buy commodities or currencies at a fixed price at a fixed date in the future.

Question 40

Foreign currency reserves

Answer 40

Foreign currencies held by central banks in order to enable intervention in the FOREX markets to affect the country's exchange rate.

Question 41

Bilateral Exchange Rate

Answer 41

The exchange of one currency against another

Question 42

Effective exchange rate

Answer 42

The exchange rate of one currency against a basket of other countries, often weighted according to the amount of trade done with each country.

Question 43

Single Currency

Answer 43

A currency that is shared by more than one country. | e.g. the euro is shared by 15 countries in the EU.

Question 44

Euro area, Eurozone

Answer 44

Term to describe the combined economies of the countries using the euro.

Question 45

Expenditure Switching Policies

Answer 45

Policies that increase the price of imports and/or reduce the price of exports, in order to reduce the demand for imports, and raise the demand for exports, to correct a current account deficit on the balance of payments.

Question 46

Expenditure reducing policies

Answer 46

Policies that reduce the overall level of national income in order to reduce the demand for imports and correct a current account deficit on the balance of payments.

Question 47

Economic integration

Answer 47

Refers to the process of reducing the boundaries that separate economic activity in one nation state from that in another.

Question 48

Non tariff barriers (NTBs)

Answer 48

Protectionist measures that restrict trade other than tariffs.

Question 49

Trade deflection

Answer 49

Where one country in a free trade area imposes tariffs on another to reduce imports, but the imports come in from elsewhere in the free trade area.

Question 50

Free trade area

Answer 50

an agreement between two or more countries to abolish tariffs on trade between them.

Question 51

Customs union

Answer 51

An agreement between two or more countries to abolish tariffs on trade between them and to place a common external tariff on trade with non-members.

Question 52

Single market

Answer 52

depends economic integration from a customs union by eliminating non-tariff barriers to trade, promoting the free movement of labour and capital, and agreeing common policies in a number of areas.

Question 53

Economic union

Answer 53

Deepens the integration in a single market, centralising economic policy at the macroeconomic level.

Question 54

Monetary union

Answer 54

the deepest form of integration, in which countries share the same currency and have a common monetary policy as a result.

Question 55

Single European Market (SEM)

Answer 55

A process adopted in the EU that promoted the free movement of goods, services and capital by harmonising product standards and removing remaining non-tariff barriers to trade.

Question 56

Monetary policy sovereignty

Answer 56

the ability of a country to pursue an independent monetary policy.

Question 57

Trade creation

Answer 57

Where economic integration results in high-cost domestic production being replaced by imports from a more efficient source within the economically integrated area.

Question 58

Trade diversion

Answer 58

where economic integration results in trade switching from a low-cost supplier outside the economically integrated area to a less efficient source within the area.

Question 59

Transaction costs

Answer 59

the costs of trading, which includes costs of changing currencies

Question 60

Price transparency

Answer 60

the ability to compare prices of goods and services in different countries.

Question 61

Stability and Growth Pact (§11)

Answer 61

limits agreed to public sector borrowing and the national debt for those EU countries that are part of the euro area.

Question 62

Automatic stabilisers (§11)

Answer 62

Elements of fiscal policy, that cushion the impact of the business cycle without any need or corrective action by the government. - For example, higher spending on unemployment benefits and welfare payments and lower taxation receipts provide an automatic fiscal stimulus in times of economic slowdown.

Question 63

Fiscal transfers

Answer 63

occur where taxation raise in one country is used to fund government expenditures in another country.

Question 64

Economic convergence

Answer 64

the process by which economic conditions in different countries become similar. - Distinguish between monetary convergence and real convergence. - Membership of the euro area only requires monetary convergence to have taken place.

Question 65

Monetary convergence

Answer 65

A type of economic convergence involving similarities in inflation and interest rates.

Question 66

Real convergence

Answer 66

A type of economic convergence involving similarities in the structures of economies.

Question 67

Optimal currency area

Answer 67

- Refers to conditions that need to be met to avoid the costs of monetary union: 1. A high degree of labour market flexibility 2. Mechanisms for fiscal transfers 3. Absence of external shocks that impact differently on different economies (asymmetric shocks).

Question 68

Asymmetric shocks

Answer 68

External shocks that impact differently on different economies in an economically integrated area.